In 1995, the entrepreneurial world was not the hotbed of angel investing and venture capitalism it is today. In India, Coca-Cola had just re-entered the market after an aborted earlier attempt. The company needed accurate maps – largely unavailable in India then – to understand its newly acquired territories. Into the breach stepped Rakesh and Rashmi Verma, mapping software licensers. “We can give you the maps you need!” they cried to Coke, despite never having produced a single map themselves.

Using Rashmi’s software and programming skills together with the American software they had been licensing to others, they then overlaid demographic and other data to enable Coke—and soon other commercial customers—to do in India what they took for granted in other parts of the world.

CellularOne, entering India in a joint venture with Essar as the Indian telecommunications industry was liberalized, was their next client. “Where should we put our mobile phone towers?” CellularOne asked, from both a technical perspective (Where is the high ground? How do we achieve uncluttered line-of-sight coverage in Bombay, a city of high rises?) and from a marketing perspective (Where are there sufficiently dense concentrations of customers with the right demographics whom we can economically serve?). Once again, the Vermas delivered.

So did the Vermas need venture capital to start, finance, and grow their business? “No,” replies Mullins. “Instead,” he says, “they identified customer after customer—even the Indian Navy—who could benefit from digital maps, charging the customers fees to cover most of the development costs of creating additional maps or applying additional demographic or other information to maps they had already created. Over the next 10 years, their mapping business grew slowly but steadily, funded by one customer assignment after another, and they became the dominant digital mapmaker in India. And they did so without raising a single rupee of venture capital.”

Back then, the Vermas weren’t doing anything radically new in shunning venture capital. They were doing what most entrepreneurs were doing in 1995, before business angels and venture capitalists hogged the spotlight: To start their business, they got their customers to pay.

Mullins believes that raising equity at the outset of a new venture’s journey is, at least most of the time, “an exceedingly bad idea, for both entrepreneurs and investors alike.” There are five main reasons he thinks so:

1. Distraction

Raising capital often requires full-time concentration, but so does starting an entrepreneurial business. One or the other will suffer when investment capital is sought. Why not raise money later when the business is less fragile?

2. Pitching vs. proving merit

Nascent entrepreneurial ideas, however promising, always raise numerous questions. Proving the merit of your idea (to yourself and to others), based on accumulated evidence and customer traction, is much more convincing than using your own wisdom and charm to pitch its merit.

3. Risk

The further you progress in developing your business, the lower the risk, as early uncertainties become more certain. Less risk translates into a higher valuation and a higher stake for the founding team.

4. Baggage

The terms and conditions attached to institutional capital are (for good reason) onerous, as investors seek to protect themselves from downside risk. The further along the path, the less onerous the baggage.

5. Difficulty

Raising capital, even in the best of times for the best of ventures, is a difficult task! Why make it even harder by trying to do it too early?

There’s certainly a lot of evidence that the odds of success for VC-backed companies are far worse than most entrepreneurs realize. According to Shikar Ghosh, a lecturer at Harvard Business School, as many as 75% of venture-backed companies fail to deliver returns on the investments they receive. Even worse, 30 to 40% of those companies end up broke and investors lose all of their money.

Mullins is not dead against raising capital – on the contrary, many of the successful customer-funded businesses he studied went down the VC route, he says. But they waited.

“Waiting to raise capital forces the entrepreneur’s attention towards his or her customers, where it should be in the first place,” he says. “Customers matter. And winning customer orders often gives your customer a vested interest in your success. They want you to stick around so they can buy again later or to ensure you will service what you’ve sold. If you wait to raise venture capital, your angels will hear your customers rave about how great your company is.”

But what about the stacks of cash that early VC can provide? Doesn’t that freedom cancel out some of these downsides? Starting up your business modestly might not be what you always dreamed of, but the small amount of money that customers will give you enforces frugality, according to Mullins, which is only a good thing. “Having too much money can make you stupid and lets you ignore your customer,” he says. “Having less will make you smarter, and will force you to run your business better too.” There’s a better source of freedom, according to Mullins. The freedom gained from the positive cash flow you get from customer traction.

Once that traction is proven, the investor’s risk is lower, meaning the terms and valuation are better. This makes the founder’s stake, and perhaps control, more substantial too, he says. “For angels, investing later reduces the number of eventual ‘lemons’ in the portfolio, and is likely to improve returns.”

In almost all of the customer-funded businesses Mullins has examined, there was, at some point, a queue of VCs clamouring to invest. This is in stark contrast with the numbers at the door of the typical early stage entrepreneur. “Unfortunately for the entrepreneur, when there’s a queue of one, it’s the investor who calls the shots on the deal. Since the successful application of a customer-funded model always results in customer traction, if, later down the track, you decide to raise capital, there’s a far higher likelihood of getting those VCs lining up round the building.”